The connection between growth-returns and value

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Reference no: EM131967574

Part 1: The Connection Between Growth, Returns, and Value

Suppose you’re looking at a company that has NO competitive advantage, and is therefore unable to generate a return above its cost of equity.

Imagine that this company has the following characteristics:

Return On Equity = 8%

Cost Of Equity = 8%

Shareholder’s Equity = $100m

Cash = $0

Value the equity in this company using the following assumptions:

A) Value with sustainable growth rate = 0%:

B) Value with sustainable growth rate = 4%:

C) Can this company create value for its investors by reinvesting its cash flows? Explain why, or why not.

Reference no: EM131967574

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